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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 12, 1997
MONARCH DENTAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 0-22835 51-0363560
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(State or Other (Commission (IRS Employer
Jurisdiction File Number) Identification No.)
of Incorporation)
4201 Spring Valley Road, Suite 320, Dallas, Texas 75244
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (972) 702-7446
N/A
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(Former Name or Former Address, if Changed Since Last Report)
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Item 2. Acquisition or Disposition of Assets.
On November 12, 1997, Monarch Dental Corporation (the "Company") closed
the acquisition of Press Family Dental Health Centers ("Press"), a San Antonio,
Texas based dental practice, which operates 3 dental offices with 13 dentists.
The acquisition was effective as of November 3, 1997.
In the acquisition, the Company paid approximately $6.6 million in cash
and issued 179,736 shares of the Company's common stock, par value $.01 per
share. The Company borrowed the cash portion of the purchase price under its
secured credit facility with a bank syndicate.
In connection with the acquisition, the former shareholders have signed
non-competition agreements with the Company for two years from the date of the
acquisition.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
Audited Combined Financial Statements of Press Family Dental
Health Centers.
(1) Report of Arthur Andersen LLP, Independent Public
Accountants.
(2) Combined Balance Sheet as of October 31, 1997.
(3) Combined Statement of Operations for the Ten Month
Period Ended October 31, 1997.
(4) Combined Statement of Stockholders' Equity for the Ten
Month Period Ended October 31, 1997.
(5) Combined Statement of Cash Flows for the Ten Month
Period Ended October 31, 1997.
(6) Notes to Combined Financial Statements.
(b) Pro Forma Financial Information.
(1) Monarch Dental Corporation Pro Forma Consolidated
Statement of Income (Unaudited) for the Ten Month
Period Ended October 31, 1997.
(2) Notes to Pro Forma Consolidated Statement of Income
(3) Monarch Dental Corporation Pro Forma Condensed
Consolidated Balance Sheet (Unaudited) as of
October 31, 1997.
(4) Notes to Pro Forma Condensed Consolidated Balance
Sheet.
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(c) Exhibits
2.1 Asset Purchase Agreement, dated November 12, 1997,
among Monarch Dental (Press) Associates, L.P., VP
Interests, L.P., Victor Press, B.D.S., P.C., VP
Investments, Inc., Victor Press, Roger Obregon,
Edgardo A. Gonzalez, Jeffrey J. Jacobs, Campbell R.
Janse, Nick M. Higgins, Frank B. Lewis and Bruce M.
Kral. *
* Previously filed
3
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Press Family Dental:
We have audited the accompanying combined balance sheet of Press Family
Dental (a Texas corporation) as of October 31, 1997, and the related combined
statements of operations, stockholders' equity, and cash flows for the ten month
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Press Family Dental
as of October 31, 1997, and the results of their operations and their cash flows
for the ten month period then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
December 5, 1997
4
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PRESS FAMILY DENTAL
COMBINED BALANCE SHEET
AS OF OCTOBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 521,134
Accounts receivable - net of allowance of $93,612 461,796
----------
Total current assets 982,930
Property and equipment, net 96,616
Other assets 12,638
----------
Total assets $1,092,184
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 272,669
Accrued payroll 156,839
Accrued liabilities 53,539
Current maturities of notes payable 18,052
----------
Total current liabilities 501,099
Notes payable 19,375
----------
Total liabilities 520,474
Stockholders' equity 571,710
----------
Total liabilities and stockholders' equity $1,092,184
==========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
5
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PRESS FAMILY DENTAL
COMBINED STATEMENT OF OPERATIONS
FOR THE TEN MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
Dental group practices revenue, net $5,549,009
Operating expenses:
Salaries and benefits 3,287,100
Dental supplies 519,736
Laboratory fees 282,760
Occupancy 247,599
Advertising 112,634
Depreciation and amortization 39,420
General and administrative 574,022
----------
5,063,271
----------
Net income $ 485,738
==========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
6
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PRESS FAMILY DENTAL
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TEN MONTH PERIOD ENDED OCTOBER 31, 1997
BALANCE, December 31, 1996 $ 185,972
Net income 485,738
Distributions to stockholders (100,000)
----------
BALANCE, October 31, 1997 $ 571,710
==========
The accompanying notes are an integral part of this combined financial
statement.
7
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PRESS FAMILY DENTAL
COMBINED STATEMENT OF CASH FLOWS
FOR THE TEN MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 485,738
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 39,420
Changes in assets and liabilities -
Accounts receivable, net (187,158)
Other assets 5,251
Accrued expenses and other current liabilities 161,981
----------
Net cash provided by operating activities 505,232
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (23,470)
----------
Net cash used in investing activities (23,470)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt
(13,994)
Distributions to stockholders
(100,000)
----------
Net cash used in financing activities (113,994)
----------
NET INCREASE IN CASH 367,768
CASH, beginning of period 153,366
----------
CASH, end of period $ 521,134
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 3,308
==========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
8
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PRESS FAMILY DENTAL
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. DESCRIPTION OF BUSINESS:
Press Family Dental (the "Company") is a Texas-based corporation. The
combined operations of the Company include management and dental services. The
Company's operations are located throughout San Antonio, representing a total of
three dental offices. All significant intercompany transactions have been
eliminated in the accompanying financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements have been prepared on the accrual
basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk
The Company grants credit without collateral to its patients, most of
whom are local residents and are insured under third-party payor
agreements. Management does not believe these receivables represent any
concentrated credit risk. Furthermore, management continually monitors and
adjusts its reserves and allowances associated with these receivables.
Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Property and equipment are depreciated using
the straight-line method over the following useful lives:
YEARS
-----
Furniture, fixtures, and equipment....................... 5 - 7
Leasehold improvements................................... 40
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and patients for services rendered, net of contractual
and other adjustments. Premiums received from third-party payors under
dental plans are due monthly and are recognized as revenue during the
period in which the services are provided to the members.
S Corporation - Income Tax Status
The Company, with the consent of its stockholders, has elected to be
taxed as an S corporation under the Internal Revenue Code. In lieu of
corporation income taxes, the stockholders of an S corporation are taxed on
their proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal income taxes has been included in the
accompanying combined financial statements.
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3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of October 31, 1997:
<TABLE>
<S> <C>
Furniture, fixtures, and equipment .......................... $ 619,328
Leasehold improvements ...................................... 144,576
---------
763,904
Less - Accumulated depreciation and amortization ............ (667,288)
---------
Property and equipment, net ................................. $ 96,616
=========
</TABLE>
4. NOTE PAYABLE:
<TABLE>
Note payable consists of the following as of October 31, 1997:
<S> <C>
Note payable to bank, with interest due monthly at a
rate of 8.75%, due October 1999, secured by
various assets of the Company ......................... $ 37,427
Less - Current maturities ................................ (18,052)
---------
Note payable ............................................. $ 19,375
=========
The maturities of note payable at October 31, 1997 are as follows:
1998 ..................................................... $ 18,052
1999 ..................................................... 19,375
---------
Total .................................................... $ 37,427
=========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company has operating leases for all of its facilities including
the dental offices and the business office, extending through 2000. Rent
expense totaled approximately $248,000 for the ten month period ended
October 31, 1997.
Future minimum lease commitments under noncancelable operating leases
with remaining terms of one or more years are as follows as of October 31,
1997:
<TABLE>
<S> <C>
1998 ........................................................ $ 277,980
1999 ........................................................ 184,740
2000 ........................................................ 90,000
---------
Total minimum lease obligations ............................. $ 552,720
=========
</TABLE>
Litigation, Claims, and Assessments
The Company is engaged in various legal proceedings incidental to their
normal business activities. Management of the Company does not believe the
resolution of such matters will have a material adverse effect on the
Company's financial position, future results of operations, and liquidity.
6. RELATED-PARTY TRANSACTIONS:
The Company leases two dental office facilities, one of which includes the
administrative office, from a related entity owned by its stockholders. The
Company pays monthly rental amounts to related parties and has commitments
10
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through 2000 which require future payments to the owners. Rent expense paid to
stockholders totaled approximately $160,000 for the ten month period ended
October 31, 1997.
7. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure about the fair value of
financial instruments. Carrying amounts for all financial instruments
approximate fair value as of October 31, 1997.
8. SUBSEQUENT EVENT:
On November 12, 1997, the Company was acquired by Monarch Dental
Corporation in an asset purchase transaction.
11
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PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma consolidated statement of income for the ten month period
ended October 31, 1997 gives effect to the 1997 acquisition of Press Family
Dental as if such transaction had been completed on January 1, 1997. The pro
forma consolidated balance sheet reflects the acquisition of Press Family Dental
as if such transaction had occurred on January 1, 1997. The pro forma
consolidated financial information is based on the consolidated financial
statements of the Company, giving effect to the assumptions and adjustments in
the accompanying notes to the pro forma consolidated financial information.
Although such information is based on preliminary allocation of the purchase
price of the acquisition of Press Family Dental, the Company does not expect
that the final allocation of the purchase price will be materially different
from such preliminary allocation.
The pro forma consolidated financial information has been prepared by
management based on the historical financial statements of the Company and Press
Family Dental as of and for the ten month period ended October 31, 1997,
adjusted where necessary to reflect the acquisition and related operations as if
a management agreement had been in effect during the entire period presented.
This pro forma consolidated financial information is presented for illustrative
purposes and it does not purport to represent what the consolidated results of
operations or financial condition of the Company for the period or at the date
presented would have been had such transaction been consummated as of such date
and is not indicative of the results that may be obtained in the future.
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MONARCH DENTAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE TEN MONTH PERIOD ENDED OCTOBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Press Family Acquisition Pro forma
Historical Dental(a) Adjustments as adjusted
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Dental group practices revenue, net $ 54,493 $ 5,549 $ -- $ 60,042
Less: amounts retained by dental group
practices 18,328 -- 1,316(b) 19,644
-------- -------- -------- --------
Net revenue 36,165 5,549 (1,316) 40,398
Operating expenses:
Clinical salaries and benefits 9,595 3,287 (1,720)(b) 11,162
Other salaries and benefits 5,266 -- -- 5,266
Dental supplies 3,414 520 -- 3,934
Laboratory fees 2,247 283 -- 2,530
Occupancy 2,975 247 (4)(c) 3,218
Advertising 1,401 113 -- 1,514
Depreciation and amortization 2,228 39 293(d) 2,560
General and administrative 5,173 574 -- 5,747
-------- -------- -------- --------
32,299 5,063 (1,431) 35,931
-------- -------- -------- --------
Operating income 3,866 486 115 4,467
Interest expense, net 1,383 -- 503(e) 1,886
Minority interest in combined subsidiaries (37) -- -- (37)
-------- -------- -------- --------
Income before income taxes and
extraordinary item 2,446 486 (388) 2,544
Income taxes 947 -- 38(f) 985
-------- -------- -------- --------
Income before extraordinary item 1,499 486 (426) 1,559
Extraordinary loss, net of applicable
tax benefit of $167 (264) -- -- (264)
-------- -------- -------- --------
Net Income $ 1,235 $ 486 $ (426) $ 1,295
======== ======== ======== ========
Income per common share:
Income before extraordinary item $ 0.19 $ 0.19
Extraordinary item (0.04) (0.03)
-------- --------
Net income per common share $ 0.15 $ 0.16
======== ========
Weighted average number of common and
common equivalent shares outstanding 7,974 8,154
</TABLE>
13
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NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME
Dental Group Practices Revenue, Net. Dental group practices revenue,
net represents the revenue of the dental facilities (each, a "Dental Office" and
collectively, the "Dental Offices") reported at the estimated realizable amounts
from third-party payors and patients for services rendered.
Net Revenue. Net revenue in the accompanying pro forma consolidated
statement of income represents revenue from Dental Offices less amounts retained
by the dental group practices. The amounts retained by dental group practices
represent amounts paid by (i) the dental professional corporations (the "P.C.s")
as salary, benefits and other payments to employed dentists and hygienists and
contracted specialists and (ii) the Company as salary, benefits and other
payments to employed dentists and hygienists and contracted specialists in
states in which ownership of dental practices by the Company is permitted. Under
the Management Agreements, the Company assumes responsibility for the management
of all aspects of the dental group practices' business other than the provision
of dental services. The Company's net revenue is dependent on the revenue of the
dental group practices.
Pro Forma Consolidated Statement of Income. The adjustments reflected
in the pro forma consolidated statement of income for the ten months ended
October 31, 1997 are as follows:
(a) The Press Family Dental column presents the historical revenue and
expenses of Press Family Dental for the ten month period ended
October 31, 1997.
(b) To reflect the impact of applying (i) the provisions of the
Management Agreement and (ii) adjustments in compensation expense
principally affecting the owners of the acquired dental group
practice pursuant to the provisions of employment agreements
entered into at the time of acquisition to the historical dental
group revenue of the dental practice, as if the Management
Agreement and employment agreements were in place at January 1,
1997.
(c) To reflect rent expense for two Dental Offices based on new lease
agreements as if agreements were in place at January 1, 1997.
(d) To increase amortization expense for the intangible assets based
upon the Company's allocation of purchase price as if the
acquisition was completed on January 1, 1997. The intangible
assets related to Press Family Dental total approximately $8.8
million at October 31, 1997 and are being amortized over a period
of 25 years.
(e) To reflect interest expense at a rate of 8.75% on a $6.9 million
note payable assumed in connection with the acquisition as if the
note was assumed at January 1, 1997.
(f) To reflect the estimated income tax effects at an estimated
effective rate of approximately 38.7%.
14
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MONARCH DENTAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Press Family Acquisition Pro forma
Historical Dental(a) Adjustments as adjusted
------------ ------------ --------------- --------------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,346 $ 521 $ 6,900 (b) $ 4,148
-- -- (6,619)(c)
Accounts receivable, net 4,556 462 5,018
Other current assets 222 -- -- 222
-------- -------- ----------- --------
Total current assets 8,124 983 281 9,388
Property and equipment, net 7,120 97 -- 7,217
Intangible assets, net 33,766 -- 8,789 (d) 42,555
Other assets 236 12 -- 248
-------- -------- ----------- --------
Total assets $ 49,246 $ 1,092 $ 9,070 $ 59,408
======== ======== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,241 $ 273 $ -- $ 3,514
Accrued payroll 1,612 157 -- 1,769
Accrued liabilities 1,140 53 -- 1,193
Federal income tax payable 660 -- -- 660
Current maturities of notes payable
and capital lease obligations 353 18 -- 371
-------- -------- --------
Total current liabilities 7,006 501 -- 7,507
Notes payable 789 19 6,900 (b) 7,808
-- -- 100 (c)
Other liabilities 2,939 -- -- 2,939
-------- -------- ----------- --------
Total liabilities 10,734 520 7,000 18,254
Minority interest in combined subsidiaries 159 -- -- 159
Total stockholders' equity 38,353 572 (572)(e) 40,995
-- -- 2,642 (c)
-------- -------- ----------- --------
Total liabilities and stockholders' equity $ 49,246 $ 1,092 $ 9,070 $ 59,408
======== ======== =========== ========
</TABLE>
15
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NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The adjustments reflected in the pro forma consolidated balance sheet
are as follows:
(a) To record the historical basis of the assets acquired and
liabilities assumed by the Company in connection with the Press
Family Dental acquisition. This acquisition has been accounted for
using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and
liabilities assumed based on the estimated fair values as of
October 31, 1997. In addition to the issuance of Common Stock, the
Company paid approximately $6.6 million in cash in connection with
the Press Family Dental acquisition. The pro forma purchase
accounting adjustments are recorded under the Acquisition
Adjustments column.
The following methods and assumptions were used to estimate fair value:
Cash and cash equivalents - The historical carrying amount
approximated fair value.
Property and equipment, net - The Company performed an
asset-by-asset review and determined that the historical carrying
amount approximated fair value.
Intangible assets - In connection with the allocation of the
purchase price to intangible assets, the Company analyzed the nature of
the dental group practice with which a Management Agreement was entered
into, including the number of dentists in the dental group practice,
number of dental offices and ability to recruit additional dentists,
the dental group practice's relative market position, the length of
time the dental group practice had been in existence, and the term and
enforceability of the Management Agreement. The Management Agreement is
for a term of 40 years and cannot be terminated by the relevant P.C.
without cause, consisting primarily of bankruptcy or material default.
The company believes that there is no material value allocable
to the employment and noncompete agreements entered into between the
P.C. and the individual dentists, since the primary economic
beneficiaries of these agreements is the P.C., which is an entity that
the Company does not legally control. The Company believes that the
dental group practices operated by the P.C.s with which it has
Management Agreements are long-lived entities with an indeterminable
life and that the dentists, customer demographics and various contracts
will be continuously replaced. The amounts allocated to the Management
Agreements, together with recorded goodwill amounts, are being
amortized over a composite life of 25 years.
The Emerging Issues Task Force of the Financial Accounting
Standards Board is currently evaluating certain matters relating to the
physician practice management industry, which the Company expects to
include a review of the consolidation of professional corporation
revenues and the accounting for business combinations. The Company is
unable to predict the impact, if any, that this review may have on the
Company's acquisition strategy, allocation of purchase price related to
acquisitions and amortization life assigned to intangible assets.
Liabilities assumed - Given the short-term nature of the
liabilities assumed, the historical carrying amount approximated their
fair value.
(b) To record notes payable assumed in connection with the
acquisition.
(c) To record the Common Stock issued, notes payable assumed and cash
paid in exchange for the assets acquired and liabilities assumed.
(d) To adjust to fair market value the assets acquired and liabilities
assumed and to eliminate assets not acquired and liabilities not
assumed by the Company as defined in the purchase agreement.
(e) To eliminate the owner's equity in connection with the purchase
accounting for the acquisition.
16
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Monarch Dental Corporation
(Registrant)
Date: January 26, 1998 By: /s/ Steven G. Peterson
----------------------
Name: Steven G. Peterson
Title: Chief Financial Officer
17
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EXHIBIT INDEX
Exhibit Index Description
- ------------- ---------------------------------------------------------
2.1 Asset Purchase Agreement, dated November 12,
1997, among Monarch Dental (Press) Associates, L.P.,
VP Interests, L.P., Victor Press, B.D.S., P.C., VP
Investments, Inc., Victor Press, Roger Obregon,
Edgardo A. Gonzalez, Jeffrey J. Jacobs, Campbell R.
Janse, Nick M. Higgins, Frank B. Lewis and Bruce M.
Kral. *
* Previously filed
